Russian steelmakers look to the future on appetite of U.S. buys

Russia's largest steelmaker, Severstal, has announced a record high first-half net profit. It rose 69%, just behind Evraz Group, with an 82% jump, and another major producer, Novolipetsk Steel, boosted its profits by 44%. But these strong results didn't

Severstal lost more than 7% last week, and Novolipetsk Steel closed down nearly 9% on Friday. Investors fear the economic situation in the US will worsen and steel consumption will decrease.

But Marat Gabitov, Metals and Mining Analyst at Unicredit Aton is upbeat about the steel sector and says the sell off has been overdone.

“Steel industry now looks quite good. Cash flows are strong, prices are high. I believe 3 and 4 quarters will be also quite high especially for flat steel, which is not that seasonal. Next year prices will increase 10-15%, that means that cash flows will be even stronger. I think that current decrease in share prices of most steel stocks is not justified.”

And steelmakers are similarly optimistic. Severstal's owner Alexey Mordashov says, he expects steel demand to keep growing. His company has spent more than $3 billion in the United States this year on steel and coal assets, making it the fourth-largest U.S. steelmaker.

Novolipetsk is now buying US producer Beta Steel for $400 million. That's on top of its most recent North American acquisition, steel pipe manufacturer John Maneely, worth $3.5 Billion.

Analysts approve of the sector's drive to buy U.S. assets, and Maksim Khudalov, Metals and Mining Analyst at Metropol says global liquidity problems are working to Russia's advantage.

“The global decrease in steel companies valuations, due to the global slowdown, which we are facing currently, is helping Russian steel makers to make cheaper acquisitions in the west. Expansion into the North American Market is kind of risky game, The market is interesting of course, it has huge capacity, consumption in the U.S. is like 110 million tons per year, the market is very well defended from any international steel such as Russian or Chinese steel, so the pricing conditions should be favourable for the companies. The only question is the cost and the ability of the companies to manipulate the cost in order to decrease it.”

Steel industry experts believe these North American acquisitions will further boost the profits of Russian producers. And they expect a massive rally in steel shares in the near future.